The instant transfer of information can no longer be taken for granted, either. The Nimda computer virus that disrupted global networks in September is an example of e-terror, which slaps yet another tax on cross-border connectivity. There are signs that businesses are tilting software budgets increasingly toward disaster-recovery services, security firewalls and antivirus programs, and backup and recovery systems. A Morgan Stanley tally of chief information officers for America’s 225 largest technology users found that 34 percent attached the highest priority to computer security in December 2001, up sharply from 16 percent in September.
September 11 has instilled fear about what might come next. To the extent that multinationals have begun to rethink the strategy of outsourcing production to a global network, the risk premium of globalization has just gone up. That undermines the global earnings stream of multinationals, and the disinflation and productivity gains that come from outsourcing. Basic economics says that a tax on cross-border connectivity will undoubtedly reduce international flows. Suddenly, the brave new world looks a lot less frictionless than it did before. There is sand in the gears of global commerce.
The costs of terror are one thing. But globalization now faces challenges from the business cycle, too. The world is in a rare “synchronous recession”: all the major economies are stumbling at the same time. This is unusual for three reasons. First, the global economy is more dependent than ever on trade, which now accounts for a 24 percent share of world GDP. That’s well in excess of shares prevailing in two earlier synchronous global recessions–17 percent in 1975 and 19 percent in 1982. Second, the world faces the sharpest ever boom-bust in trade. Global trade volumes surged by a record 12.4 percent in 2000 but shriveled after the pop of the tech bubble, with 2001 likely to show an increase under 1 percent.
Third, the world has become unbalanced, far too dependent on the American growth machine. The United States accounted for about 40 percent of growth in world GDP in the five years ending in mid-2000, nearly double its share of total world GDP. So it’s not surprising that recession in America quickly became the world’s recession. That’s hardly a testament to the greater balance in the world economy that globalization was supposed to bring.
There’s always a chance of making too much of September 11. The defense of globalization rests largely on the impeccable logic of free trade–that the rising tide of global trade lifts all boats. But it’s not the theory that is in question. It’s the relevance of the theory to a world very different from the one most models of globalization envision. Terror has imposed new taxes on free trade, exacerbating a lethal synchronous recession that makes it increasingly difficult for governments to resist protectionist pressures. Trade frictions are rising–especially between Europe and the United States, as well as between Japan and China–eroding the harmony that globalization was long thought to bring.
In the years ahead, the world economy is likely to grow more slowly, especially when compared with the roaring 1990s. Most important, this reflects a likely reduction in productivity growth, the principal source of economic dynamism. The war against terrorism raises business operating costs–increasing outlays to cover office, mailroom and cybersecurity, insurance and shipping premiums, and the need to carry more inventory as a hedge against transportation disruptions. Add to that a likely increase in defense and homeland security, and it is safe to conclude that more inputs will be required to generate national output–placing a lasting drag on productivity.
Diminished globalization will sap growth. So will America’s hangover from excesses of the 1990s–low savings, high debt, excess capacity and a massive current-account deficit. Underly-ing growth in the U.S. economy could slow from about 4 percent in the late 1990s to the 2.5 to 3 percent range. Unless the world uncovers a new growth engine, September 11 could well have marked a critical turning point for the global economy.
